Study: Community Banks Essential, But Challenged

Community banks are a vital part of the credit landscape, according to a new report. Despite their popularity with customers, their numbers are shrinking. Federal regulators joined with state authorities to take an in depth look at community banking around the country in what's being viewed as the most comprehensive study of its kind.

Connecticut's banking commissioner Howard Pitkin said community banks are a breed apart. "The very large banks are very far away from their customers," he said. "A community bank, on the other hand, is run by local people. They're much more in touch with the needs of their marketplace, and can connect better with the customer."

Pitkin said that became especially evident in the wake of the financial crisis five years ago. "During the 2008 crisis," he said, "the community banks stepped up and funded loans for nearly 70 percent of the credit needs of the country for small businesses, where the large banks shut the credit window down." The study found that customers appreciate this responsiveness, to the point where they're prepared to pay a little more for the services of a community bank.

The study finds that community banks are responsible for 46 percent of small business loans, 65 percent of farm loans, and 35 percent of commercial real estate financing. Martin Geitz, the President of Simsbury Bank and the President of the Connecticut Community Bankers Association, confirmed the sector punches above its weight. "Our impact on the economy is disproportionate to the level of deposits we have available to fund the economy," he said, "and we're funding very important parts of the economy."

Despite that, community banking has shrunk dramatically in recent years. Two decades ago, there were more than 10,000 community banks in the U.S. At the end of last year, there were about 6,000. Connecticut has seen a larger than average contraction, with fewer than ten percent of deposits now in community banks.

Geitz said many small banks were gobbled up in the free-for-all atmosphere of the '90s and early 2000s. "The major drivers of the consolidation of the industry were essentially economic economies of scale," he said. "That was all, however, enabled by changes in regulatory limitations."

But now the pressures are reversed. Post-crash, regulation is back, and Commissioner Howard Pitkin said one of the biggest challenges is a one-size-fits-all approach that's making the community banks also pay for the sins of the big Wall Street investment banks. "When Washington writes a law or regulation, they write for everybody," he said, "but most of all, they write it for the large banks, who can readily afford complying with it. They just hire another lawyer." States are now attempting to formulate a tiered system of regulation that they hope will be adopted by federal authorities, and that can once again give community banks a competitive edge.